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November 2011 – IRAs, sometimes 60 days means just that 60 days!

When it comes to IRAs, sometimes 60 days means just that 60 days!

Many are aware that you can “roll-over” an IRA into another so long as the transferred funds arrive in the new IRA within sixty (60) days following their original withdrawal.

Caution drives many clients to engage in IRA roll-overs through a direct “trustee-to-trustee” transfer (i.e. where the trustee/custodian of your “old IRA” transfers your credit balance to the trustee/custodian of your new IRA).  However, the idea of using the IRA credit balance for sixty (60) days, interest free, is sometimes just too appealing.

But, what happens if you can’t redeposit the funds in your new IRA within sixty (60) days of their withdrawal from your old IRA?

The IRS has been fairly lenient in granting “waivers of the sixty (60) day time limit” in some circumstances on the back of a 2003 Revenue Procedure (the “2003 Procedure”).  Recently, the IRS issued a private letter ruling holding that where the account holder employs the IRA funds in a transaction which prevents those funds’ from being deposited timley in the new IRA, the 2003 Procedure will not save their tax-free roll-over.

So mistakes by the old and new trustees/custodians can earn 2003 Procedure protection, but acting like a arbitrageur with your IRA roll-over funds leaves you without 2003 Procedure protection.

A failed IRA roll-over produces regular income tax on the withdrawal as well as a 10% penalty tax where the account holder isn’t 59 ½.

If you’re planning an IRA roll-over, or a Roth conversion, contact your Holbrook & Manter tax representative and be safe rather than sorry.

TAGS: Compensation planning; IRA